In Conversation With … features an interview between a leader or figure involved in public education and a representative of the Kentucky School Advocate.
KSBA’s director of governmental relations, Eric Kennedy (right), advocates for school boards and their students, and for K-12 education with state and federal lawmakers and others. But he previously was an analyst for the General Assembly’s Appropriations and Revenue committees and helped draft state and local tax laws and the state budget – which is why he is addressing this topic as boards are getting ready to set tax rates soon.
Q: What types of taxes does a school board have the authority to impose?
A. They must impose the property tax on all taxable property in the district. There are also so-called permissive taxes – three other taxes that a board may impose.
Q. What are the permissive taxes?
A. One is the utility gross receipts tax. Almost all districts impose it and it appears as a line item on various utility bills. Then there is the occupational tax, which a small number of districts impose. The third is the excise tax. I do not believe any district ever has imposed it. It would work much like a local income tax and would be difficult to actually collect.
Q. Does the property tax encompass more than homes and other real estate?
A. Yes, it includes tangible personal property, such as motor vehicles and business equipment.
Q. Do tax rates change each year?
A. Rates for the permissive taxes don’t usually change, but every board typically changes the tax rate imposed on property every year.
Q. Where do school boards get the information that helps them determine what property tax rate to set each year?
A. Usually by the end of April, the property valuation administrators (PVAs) turn in property value assessments to the state Department of Revenue, which does audits to make sure the PVA is accurate and there are no irregularities. After those tax rolls are certified, the information goes to the Department of Education, which provides each district with a report of the total assessed value of property and rate options the board might choose to impose. Each option includes an estimate of what that rate would be and how much money it would bring in.
Q. What are the rate options?
A. The options are the compensating tax rate, the subsection (1) rate, the 4 percent rate, and a category called “other,” which simply means a rate that is not exactly any of these other options.
Q. What are the differences in these rates?
A. The compensating rate is whatever rate necessary to bring in approximately the same amount of money as that district collected in the previous year. The subsection (1) rate is something of a maximum tax rate. It refers to KRS 160.470, subsection (1), which says a board may impose a rate that would generate no more revenue than the previous year’s maximum rate that they could have imposed that prior year even if they didn’t. It’s something of a catch-up procedure, where last year perhaps you set the compensating rate but you could’ve done something higher, then because of some changed circumstance the board believes it needs to collect more revenue this year.
Q. How about the 4 percent rate?
A. It is the rate that would bring in about 4 percent more money than was generated in the prior year. It is not a limit on the rate a board can impose, although many people often say this. This rate allows for revenue to grow to mitigate the impact of inflation.
Q. Which rates are used most?
A. The most commonly levied rates are the compensating rate and the 4 percent rate. In each of the last 10 years, more boards have levied the 4 percent rate than any other option. Some districts have taken the 4 percent rate every single year for 10 years.
Q. Beyond the revenue they generate, what differentiates these rates?
A. Their public hearing requirements. The compensating rate has no public hearing requirement and is not subject to a possible voter recall. If you choose a rate higher than the compensating rate, there must be a hearing to give the public a chance to say, “Yes, we support you, we need more money” or “No, we don’t.”
Q. What are the requirements of the 4 percent rate?
A. There is a hearing requirement, but it is not subject to recall, so in theory every board could bring in about 4 percent more money from the local property tax every year using this rate. If a board tried to set a rate to bring in more than a 4 percent increase, the portion of the rate that would go beyond that level is generally subject to a possible voter recall.
Q. What causes property tax revenues to vary year to year?
A. The overall economy can cause assessed property values to fluctuate. When a major employer closes or lays people off, not only will the company’s own property diminish in value but so will home values if no one is buying houses or moving there. The opposite can happen if population is growing and businesses are moving in or expanding.
Q. How does growth affect tax rates?
A. In a growth area, the 4 percent rate can bring in more money than last year, but the actual tax rate on each person’s tax bill might fall. The opposite is true in a place where total assessed value is falling. In those cases, even if you took the compensating rate to bring in the same amount of revenues, because property is worth less, the tax rate itself has to increase, sometimes substantially.
Q. So boards must have a finger on the pulse of the local community?
A. Yes, they must know if population is rising or falling. Is employment increasing or decreasing? Are any big employers struggling; might they go out of business?
Q. Are there any numbers that are particularly important in the tax report from the Department of Education?
A. There’s not much detailed information, but it does show the total assessed value of property so boards can see if that is rising or falling dramatically. Another number board members need to know is the tax collection rate, which can vary substantially. The sheriff’s office should be able to provide the collection rate over time.
Q. How much can the collection rate vary?
A. It’s getting worse in some areas. In tax year 2007, before the Great Recession, the collection rate was not lower than 90 percent in any county. In 2015, it was less than 90 percent in nine counties. For tax year 2016, three counties had a collection rate of 80 percent or less.
Q. What should boards glean from this?
A. When the local economy is struggling so badly people are having a hard time paying their taxes, a board may need to take that into account in setting a tax rate. Citizens who are struggling to pay taxes at the current rates are probably less likely to pay if their tax bill increases. Boards have to protect the revenue coming in while keeping in mind the ability and appropriate level for taxpayers to pay.
Q. When do boards typically get the report from the Department of Education?
A. The final numbers are usually sent during the summer, which is why the rate is often selected during a board’s August meeting. The superintendent might present the rate calculations at one meeting, ask the board to study them, and then the board will make the rate decision at the next meeting. If the board sets a rate that is subject to a hearing or a recall, then those steps may have to play out in or around August and September.
Q. What are the effects of not taking the 4 percent rate?
A. Some board members feel that KSBA urges them to levy the 4 percent rate every year, which is not true. We have advised members to take in all factors, be mindful of all issues and do what they think is best for the students and the district. We say be mindful of the collection rate and don’t shoot yourself in the foot by increasing the rate if it might mean you will actually collect less money.
Q. What does taking the 4 percent rate demonstrate?
A. More boards levy the 4 percent rate each year than any other option. It shows the commitment of the community to its schools; but at the same time, I remind everyone about what the Supreme Court said in the 1989 decision that led to KERA – that the sole responsibility for providing for the system of public schools lies with the state legislature and this obligation cannot be shifted to local communities and local districts. It said that while the legislature could empower local school boards to enact taxes to supplement state support, such local efforts may not be used by the state as a substitute for adequate state funding. It’s meant to supplement state funding, not supplant it.